Export US natgas? Get something for it, first

As the bastion of global free trade, the U.S. has been on the forefront of signing free-trade treaties with multiple nations, including the latest in the works: The Trans-Pacific Partnership and the Trans-Atlantic Free Trade Area. In the background of these treaties, a seemingly unrelated debate has been taking place in the U.S. energy landscape: The export of natural gas.

With multiple headlines ranging from the U.S. becoming the new Saudi Arabia to the environmental disaster that this newfound hydrocarbon wealth portends, people have seemingly paid short shrift to what the U.S. can do with this resource geopolitically.

There has been animated discussion and various economic studies published by interested parties as to whether the U.S. should allow for free exports of liquefied natural gas (LNG). The oil and gas industry has come out deeply in favor of unfettered exports, citing reports that signify the amount of GDP growth and jobs added if this were to take place. The fact that this will also increase their profits significantly is not lost on their detractors.

Local industry, including manufacturing, petrochemicals and fertilizers, as well as left-leaning pundits, have called for a restriction of LNG exports to keep the historically low-priced natural gas at home to rebuild a decimated industrial sector. So far, the Department of Energy has provided non-free-trade agreement trade approval to four proposed LNG plants that allows them to export LNG to even those nations without a free-trade agreement with the U.S., and more approvals are expected before the end of the year.

However, lost in this whole discussion between export and domestically-focused advocacy, is the role this large natural-gas resource can play for the U.S. in ongoing and future trade negotiations. The largest importers of LNG are Japan and South Korea, with India, China, the UK and Spain not far behind. While South Korea already has a free trade agreement with the U.S., these other countries do not.

Japan belatedly joined the Trans-Pacific Partnership negotiations this July and while the exact reasoning is still under speculation, it cannot be overstated that the lure of cheap U.S. sources of natural gas, specifically after Japan's nuclear disaster following a tsunami in March 2011, probably played a large role in this decision.

Now that Japan is at the negotiating table, the added incentive of free natural-gas exports — for which the Japanese paid almost $20/per million British Thermal Units (MMBtu) vs. domestic U.S. prices around $3-3.5/MMBtu last winter) — can be used to bring tariff barriers around "sensitive" industries like agriculture and automotives to the negotiating table. Similarly negotiations for the Trans-Atlantic Free Trade Area, which have moved at a snail's pace, could be pushed forward.

The tumultuous relationship that the EU and Russia enjoy because of the near monopolistic chokehold that Russia has on EU gas supplies should be incentive enough for the EU to negotiate. The EU has already brought an antitrust case against the Russian state-owned gas company, Gazprom. Given already slow economic-growth prospects in the EU and the high prices they pay for Russian natural gas, the added incentive of extensive U.S. exports to the EU could make the countries more open to progress on the free- trade talks.

This will play a role specifically in agriculture where European Union members levy heavy tariffs on agricultural imports, and to a lesser extent on chemical and transportation equipment. In the longer term, countries like India that are also starved for energy and have few cheap options to obtain it would likely be open to some kind of trade talks and concessions (maybe around lucrative government contracts or U.S. company FDI) if the U.S. offered them open access to its hydrocarbon resources.

If the U.S. government is able to successfully wield this carrot in trade talks with various countries, it will take another step towards becoming Saudi Arabia, a country that has used its position atop the oil food chain to gain an upper hand in global geopolitics for decades.

—By Kartik Misra

Kartik Misra is a senior analyst at Energy Intelligence, an independent analysis firm that serves the energy industry. Follow them at @energyintel.

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